Will Toll Brothers' Big Deal With GTIS Partners Accelerate Growth?

Toll Brothers just announced a new land acquisition that could net $2.6 billion in home sales. How much growth will it really get from the deal, and where does it stand versus Meritage Homes and fellow luxury builder and NVR, Inc subsidiary NVHomes?

Jan 28, 2014 at 8:00PM

Luxury homebuilder Toll Brothers (NYSE:TOL) and privately held GTIS Partners have acquired 3,700 acres of prime real estate near Houston, stating that the property could net up to "$2.6 billion in home sales in aggregate," once the project is complete. Considering that Toll Brothers did just under $2.7 billion in total sales over the past 12 months, this looks like a massive source of future growth. However, just a little digging shows that the deal isn't as lucrative as it seems. 

How much upside does it offer Toll Brothers? Does this make the company a better investment today than peers like Meritage Homes (NYSE:MTH) and NVR Inc. (NYSE:NVR)? Let's take a closer look.

The fine print
While this project is expected to generate 6,500 new homes and $2.6 billion in sales, missing out on one critical detail drastically alters the value to Toll Brothers. From the release (emphasis mine):

 ...the Toll-GTIS joint venture expects to develop approximately 6,500 single-family home lots which will be sold to local, regional and national home builders over the anticipated life of the community. Toll Brothers may acquire up to 1,750 of those lots for its own home building operation over that time period. When fully built out, it is anticipated that Sienna South will have generated gross home sales of over $2.6 billion. 


Water park at Sienna Plantation. Source: Toll Brothers

Toll Brothers will only build about one-quarter of this development. With a little quick and dirty math, the average home will net an average sale price of $400,000. For Toll Brothers, this would be around $700 million in sales -- not a small number, but a far cry from $2.6 billion. However, Toll Brothers won't be building "average" houses here, and will likely net a higher average sale price. Additionally, the company may also share in the profits from selling parcels to other homebuilders, but that's speculation as the details of the deal aren't public. 

Housing still strong, will remain strong in 2014 and 2015
While this deal isn't as huge as it looks on the surface, at least $700 million in future sales lined up is great news for Toll Brothers investors. It's also a reminder that the national housing market continues to improve.

Existing home sales and new construction both continue to improve, with the latest 2013 numbers showing the best year existing home sales since 2006. New home construction starts increased almost 10% in 2013; the highest levels since 2007, even with softness in November and December, partly due to extreme weather in the Northeast. 


Master suite of Sandhaven floor plan at Sienna Plantation. Source: Toll Brothers

The outlook continues to be positive, if a little muted. The Mortgage Bankers Association recently revised its 2014 mortgage projections for home purchases down 5%, from $711 billion to $677 billion. However, even after the downward revisions, the projection is for a $25 billion increase in mortgages for home purchases from 2013. 2015 is projected even stronger, with purchase mortgages to increase a whopping $119 billion, to nearly $800 billion in total even as interest rates will approach and break 5% this year. 

NVR and Meritage Homes worth a look
NVR is actually made up of four different builders: NVHomes, Ryan Homes, Fox Ridge, and Heartland Homes, and its separate financing business, NVR Mortgage which offers financing to customers of all four homebuilder brands. What makes NVR attractive is how incredibly well management has returned value to investors, primarily through a long-term stock buyback program that has reduced shares outstanding by 30% over the past decade, even as the company has grown its market cap by 49%. This has led to a 115% return for investors -- better than the market over the same period of time:

NVR Shares Outstanding Chart

NVR Shares Outstanding data by YCharts

While net income is well down from the more than $700 million earned at the peak of the housing boom, NVR managed to make money even during the depths of the financial crisis:

NVR Net Income (TTM) Chart

NVR Net Income (TTM) data by YCharts

For long-term investors, this recipe of financial strength and shareholder-friendly behavior is worth a closer look. 

Meritage Homes is by far the smallest of the three, and like Toll Brothers, suffered heavy losses during the recession. However, it now generates impressive earnings off much lower revenues than the other two, and carries significant growth potential in its key markets of Southern California, the Southwest, and Southeast. Preliminary results for the fourth quarter indicate that the company will continue driving impressive earnings results, with margin levels increasing 400 basis points versus 2012's fourth quarter. 

The bad news? Meritage also announced a public offering of 2.2 million shares, diluting existing investors by 6% overnight. While troubling on the surface, this will net the company $96 million in working capital, which will help accelerate growth. 

Money is historically cheap; housing continues to rebound
Housing is a cyclical business, and it's best to invest on the upswing. After the bust in 2009, the environment has continued to improve every year. Even with the Fed's tapering expected to move mortgage rates higher, they remain historically low, and will for the next few years. From a valuation perspective, NVR and Toll Brothers (after taking a big hit to net income this year) are expensive on a P/E basis, at 21 and 38, respectively, while Meritage remains near 10, belying its growth potential. However, the long-term story on housing, and the sound execution of all three companies makes them worth consideration.

Looking for stocks to get rich with? 3 stocks from one of the best:
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

Jason Hall owns shares of Meritage Homes. The Motley Fool recommends Meritage Homes. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers